Growth Companies

Another Year of Caution for Corporate Spending: Fitch

The credit rating agency forecasts another disappointing year for capex expansion and M&A, as companies continue their focus on cost containment.
Vincent RyanApril 28, 2014
Another Year of Caution for Corporate Spending: Fitch

There is a widespread feeling that companies will begin accelerating capital spending in 2014. Count Fitch Ratings among the market watchers that are not “feeling it.” Global corporations will continue to run in place in 2014, resulting in only “moderate expansionary capex, tight liquidity management and a continued focus on cost containment in an effort to conserve cash,” according to a Fitch Ratings report released Monday morning.

Analyzing the performance of global companies in the first quarter, Fitch says “improving” market sentiment across developed markets will allow many companies to continue to boost their debt capacity and ratings “headroom” from 2013. But for the most part boards of directors will seek to preserve companies’ financial strength rather than allocate capital toward investments with any substantial risk, the Fitch report says. For example, companies will continue to take a conservative approach to mergers and acquisitions, buying only opportunistically.

For investors, that amounts to low default risk in corporate bond issues. Still there will be a “drip feed” of downgrades until both the European and U.S. economies strengthen, Fitch says. Any downgrades over the next 12 months, however, will likely arise from company-specific issues rather than industry trends, Fitch says. 

The economic climate is nowhere near risk free, however. Emerging markets, for example, “face new headwinds from the recent political turmoil in Russia/Ukraine and a continuation of the flight of capital to safer developed markets as the Federal Reserve tapers its quantitative easing [program].” Emerging market growth will outpace that of major advanced economies in 2014, but “the growth differential [will narrow] to its closest level in over a decade,” Fitch says.

Sector-wise, Fitch says in the “Global Corporate Investor Chart Book” report, there are elevated risks in U.S. agribusiness and coal production, as well as southern European utilities, telecoms and chemicals companies.